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There are rules, regulations and dodges

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There are rules and regulations, and then there is leeway and dodges. It’s all down to how the rules are viewed and how they are regulated that counts. This is the big debate in the UK right now. Party animal Boris’s government has received many penalties for breaking the Covid restrictions they themselves created, whilst his opposition leader Kier Starmer has said he will resign if gets a penalty, as he follows the rules. In fact, his nickname is Mr. Rules, but then he is a lawyer and lawyers follow the law (?).

In banking, that last statement is not quite true. For example, I always remember a quote from Michael Lewis’s book Liar’s Poker, when meeting with the bank’s general counsel – their lawyer – who said: “my role is to find the chinks in the regulator’s armour”. In other words, a bank lawyer’s job is to work out how to buck the rules.

There are regulations and rules … and then there are views and interpretations of the rules and regulations. Equally, for many years, there has been a major leverage in finance of regulatory arbitrage. What’s that? It’s using regulations in different countries to ensure that you can perform activities that may be illegal in one but not in another.

This is made clear by how large corporations deal with tax. I remember when the Libor issue hit the headlines and Barclays Bank CEO Bob Diamond was forced to resign, that Barclays internal financial management came under scrutiny. It is claimed that the bank avoids almost £2 billion of tax by a lucrative deal with Luxembourg, but they are not alone. Several banks use offshore entities to record around 14% of annual profits in order to minimise tax. That’s around £17 billion of tax avoided.

They are not alone.

We know that the Big Tech companies do the same, which is why national governments are on their case:

These are one form of chinks in the regulator’s armour: paying zero tax.

Another form of chink is the ability to use financial products that are illegal in one country but legal in another. You can move money between countries to support high net work clients to not only avoid tax, but to launder illegal financial operations.

The Anti-Money Laundering rules are meant to be exceptional but are, in reality weak. When you hear figures of over $2 trillion being laundered a year, that is obvious. What’s going wrong? Well, it’s mainly complex networked criminal operations that recognise, in the same way as tax dodging, that there are rules and regulations, and ways to work around them.

  • The estimated amount of money laundered globally in one year is 2 – 5% of global GDP, or $800 billion – $2 trillion in current US dollars;
  • 90 percent of the money laundered goes undetected. (Source: Forbes);
  • 62% of compliance officers say criminal activity is getting harder to spot (Basel System Reports 2021)
  • Anti-money laundering activities recover only 0.1% of criminal funds.

Source: Renolon

In fact, such illicit activity is sometimes compared to tracking terrorists in airports. You clamp down on the many to catch the few. The result is that all of us have to jump through hoops to check in for flights or open accounts, and can often find nanny state behaviours causing us problems. There are rules, darned rules and regulations.

And then the fact is that the more clever the lawyer and the more wealth the company or individual can deploy, the more likely they are able to avoid tax and launder money.

It’s all about the money, money, money.

For more on these topics check-out tax avoidance and money laundering discussions on this blog.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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